Evaluate the QSBS position before the paperwork is final.
Section 1202 can provide a major federal tax benefit, but it is not automatic. Eligibility can depend on how the corporation was formed, when and how each stock lot was acquired, the company's assets and business activities, redemptions, ownership changes, and the records available years later.
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Many QSBS problems begin long before a stock sale. A funding round may affect the gross-asset test. A repurchase may create a redemption issue. A conversion, merger, option exercise, secondary purchase, or change in business activity may affect the analysis. Early review gives the company and shareholder time to find missing records, understand risks, and coordinate the next step.
For qualifying stock acquired after July 4, 2025, federal law added a tiered exclusion: 50% after 3 years, 75% after 4 years, and 100% after 5 years or more, if all requirements are met. The per-issuer dollar limit increased from $10 million to $15 million for qualifying post-July 4, 2025 stock, and the company gross-asset threshold increased from $50 million to $75 million. Inflation adjustments begin in 2027.
Older stock follows the earlier rules. Stock acquired on or before July 4, 2025 generally remains subject to the prior holding-period, dollar-limit, and gross-asset framework. Each stock lot must be reviewed separately.
California warning: California generally does not conform to the federal Section 1202 gain exclusion or Section 1045 rollover. A federal exclusion may still leave a California tax bill.
Founders and companies: Before forming or converting to a C corporation, issuing founder or investor shares, raising capital, repurchasing stock, reorganizing, or changing business activities.
Investors and employees: Before purchasing original-issue shares, exercising options, transferring stock, receiving gifted stock, or relying on a prior QSBS statement.
Owners preparing for an exit: Before signing a letter of intent, tendering shares, completing a secondary sale, selling the company, or considering a Section 1045 rollover.
Domestic C corporation status and entity history
Original issuance and how each shareholder acquired the stock
Gross assets before and immediately after relevant issuances
The 80% active-business requirement and excluded business activities
Holding periods, option exercises, gifts, trusts, partnerships, and transfers
Redemptions, repurchases, tender offers, and secondary transactions
Cap tables, board approvals, stock agreements, tax returns, and financial records
Federal exclusion limits, California exposure, and possible Section 1045 timing
For a founder or company before forming, converting, issuing stock, exercising options, or accepting a major investment.
For a company preparing for a financing, redemption, reorganization, acquisition, business pivot, or ownership change.
For a shareholder or company preparing for a stock sale, tender offer, merger, secondary transaction, or possible Section 1045 rollover.
A QSBS eligibility and risk matrix
A stock-issuance and ownership timeline
A list of missing records and unresolved facts
A federal and California tax summary
Questions that should be coordinated with corporate or securities counsel
A written action list for funding, restructuring, sale, or tax-return reporting
Intro call: We confirm fit, timing, and the likely scope. The intro call does not provide a final QSBS conclusion.
Secure records: We provide instructions for uploading documents through our secure portal. Please do not email sensitive stock, tax, or financial records.
CPA-led review: We analyze the corporation, stock lots, ownership history, business activity, transactions, and supporting records.
Written findings: We explain what appears to qualify, what remains uncertain, and what should happen next.
Strategy meeting: We review the findings and coordinate implementation with your attorney or other advisers when needed.
JH Group CPA provides tax analysis, documentation review, planning, and tax-return coordination. Corporate and securities counsel should address legal formation documents, stock rights, shareholder agreements, fiduciary duties, securities compliance, and transaction documents. QSBS treatment cannot be guaranteed; the conclusion depends on the actual facts, documents, dates, and law.
QSBS is stock that meets the requirements of Internal Revenue Code Section 1202. A qualifying noncorporate shareholder may be able to exclude part or all of eligible federal gain when the stock is sold.
No. The company must be a qualifying domestic C corporation, the stock generally must be acquired at original issue, and the company, shareholder, business activity, holding period, and transactions must satisfy detailed rules.
Ideally before the company is formed or converted, before stock is issued, before a funding round, and again before a major redemption, restructuring, or exit.
Some businesses are excluded by Section 1202, including many health, law, accounting, consulting, financial, brokerage, banking, insurance, farming, hotel, and restaurant businesses. The actual activities and revenue streams must be reviewed.
Stock bought from another shareholder generally does not meet the original-issuance requirement. Certain gifts, inheritances, partnership distributions, conversions, and reorganizations have separate rules.
Generally no. California does not conform to the federal Section 1202 exclusion or Section 1045 rollover, so California tax may remain even when federal gain is excluded or deferred.
Section 1045 may allow gain deferral when qualifying QSBS held for more than six months is sold and replacement QSBS is purchased within the required 60-day period. The timing and reporting rules are strict.
No adviser can guarantee the result without complete facts and records, and final treatment may be reviewed by a taxing authority. We provide a documented tax analysis, identify risks, and explain what evidence supports the position.
Gather incorporation and conversion records, board approvals, stock purchase or option documents, cap tables, financing records, balance sheets at issuance, tax returns, business-activity information, and any redemption or transfer history.
No. The intro call is used to understand the transaction, timing, and scope. A reliable QSBS conclusion requires a paid review of the relevant documents and facts.
Page last reviewed: August 2026.
If stock is being issued, funded, restructured, transferred, or sold, request a review before the paperwork is final. Call 626-943-2888, email info@jhgroupcpa.com, or request an intro call.
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